In
1987, design-build projects accounted for less than three percent of
all non-residential construction in the United States.
Today, industry estimates indicate that the design-build
project delivery method accounts for nearly 30 percent of all
non-residential construction in the US.
Design-build offers numerous advantages to an owner. Among them, removal of the owner as an intermediary for
disputes between the contractor and the design firm, compression of
schedule and the potential to significantly reduce cost
escalation--all highly motivating factors to an owner who is
considering which project delivery method to choose.
And, while design-build may not result in the lowest overall
cost for a project, it does allow an owner to seek out alternative
design proposals to achieve the desired objective.
In
October 1997, the American Institute of Architects released the newly
revised A201 General Conditions Document (ii).
This document is used in conjunction with the AIA Owner
Contractor Agreement and contains a provision for the delegation of
design to the contractor. Although
the previous (1987) edition of A201 also contained a design delegation
provision, the 1997 edition addresses this issue in considerably
greater detail, and its inclusion reflects that delegation of design
responsibility, if any thing, may be on the rise.
While design may not be delegated under all contracts, even
under the new 1997 edition of A201, the potential exists for the
contractor to be required to provide design services.
Thus, this contractual relationship is very similar to
design-build except that the contractor is responsible for a specific
design component, e.g. electrical, HVAC, etc. versus the design of the
entire project.
Each
of the above-mentioned changes in project delivery presents new and
challenging scenarios to be addressed by the insurance marketplace.
This paper will address the various design liability and
insurance issues associated with these recent project delivery
developments, and compare them to those encountered with the more
traditional design-bid-build project delivery method.
I.
PROJECT CHARACTERISTICS
A.
Design-Bid-Build
The
design-bid-build project delivery method places the owner “at the
center of the universe” as the result of separate contractual
relationships with both the design entity and the contractor.
In this arrangement, the owner warrants to the contractor that
the plans and specifications are buildable.
If problems arise during the course of construction - or even
after substantial completion - the owner becomes the intermediary
between the contractor and design firm. Increasingly, owners are turning to the design-build project
delivery method to remove themselves from this intermediary role.
Secondly, the design-bid-build project delivery method has a
longer total delivery schedule due to the sequential nature of this
delivery process. This
delivery method does not offer the opportunities to expedite
construction phases that are available with design-build.
Finally,
the design-bid-build process creates greater potential for schedule
creep or cost escalation since the design and construction processes
are performed independently. Cost escalation and schedule creep inevitably lead to claims
in the design-bid-build process.
The design-build project delivery method can minimize the
development of these claims since the designer and contractor are
brought together early in the project delivery process, and work as a
team.
B.
Design-Build
With
the design-build project delivery, owners are no longer at the center
of the universe. Under
design-build, the owner contracts with a Single Point of
Responsibility (SPR) entity to provide both the design and
construction services. Unlike
the design-bid-build scenario where the owner warrants the design to
the contractor, the SPR entity now has responsibility for and warrants
the design to the owner. In
this situation, the owner will call upon the SPR entity to respond to
and correct any design problem that may arise during the course of
construction, or following completion of the project.
Design-build
gives design firms and contractors the opportunity to work as a team,
and to deliver a quality project on time and within budget.
The recently released study “Project
Delivery Systems: CM at Risk, Design-Build, Design-Bid-Build”,
published by the Construction Industry Institute (CII), substantiates
many of the theorized advantages of design-build versus other project
delivery methods. The Executive Summary of the CII document states that
design-build has “...significantly less design and construction cost
growth when compared to design-bid-build; that design-bid-build
systems have the greatest design and construction schedule growth; and
that quality associated with design-build, often maligned by many, is
better than quality performance in design-bid-build.”[i]
This study indicates that the design-build project delivery
method can minimize many of the problems which often lead to claims in
the design-bid-build process.
C.
Design Delegation
Importantly,
delegation of design responsibilities may be implemented even in the
traditional design-bid-build project delivery method, as provided for
under Article 3.12.10 of AIA Document A201-1997 (ii). Article 3.12.10
of the 1997 A201 (ii) document now provides a framework that outlines
when and how design may be delegated as part of the design-bid-build
project delivery method. Thus,
when design is delegated, pursuant to section 3.12.10 the contractor
will be providing design-build services for a specific portion of the
project even though the project is a design-bid-build project.
Article
3.12.10 of the A201 Document reads as follows:
The
Contractor shall not be required to provide professional services
which constitute the practice of architecture or engineering unless
such services are specifically required by the Contract Documents for
a portion of the Work or unless the Contractor needs to provide such
services in order to carry out the Contractor’s responsibilities for
construction means, methods techniques, sequences and procedures.
The Contractor shall not be required to provide professional
services in violation of applicable law.
If the professional design services or certifications by a
design professional related to systems, materials, or equipment are
specifically required of the Contractor by the Contract Documents, the
Owner and the Architect will specify all performance and design
criteria that such services must satisfy.
The Contractor shall cause such services or certifications to
be provided by a properly licensed design professional, whose
signature and seal shall appear on all drawings, calculations,
specifications, certifications, Shop Drawings and other submittals
prepared by such professional. Shop
Drawings and other submittals related to the Work designed or
certified by such professional, if prepared by others, shall bear such
professional’s written approval when submitted to the Architect.
The Owner and the Architect shall be entitled to rely upon the
adequacy, accuracy and completeness of the services, certifications or
approvals performed by such design professionals, provided the Owner
and Architect have specified to the Contractor all performance and
design criteria that such services must satisfy.
Pursuant to this Subparagraph 3.12.10, the Architect will
review, approve or take other appropriate action on submittals only
for the limited purpose of checking for conformance with information
given and the design concept expressed in the Contract Documents.
The Contractor shall not be responsible for the adequacy of the
performance or the design criteria required by the Contract Documents[ii].
Article
3.12.10 (ii) has numerous provisions which must be reviewed to
determine when and if design delegation will occur under the contract.
A discussion of this contract provision follows.
First,
Article 3.12.10 states “The Contractor shall not be required to
provide professional services which constitute the practice of
architecture or engineering unless such services are specifically
required by the Contract Documents for a portion of the Work or unless
the Contractor needs to provide such services in order to carry out
the Contractor’s responsibilities for construction means, methods,
techniques, sequences and procedures.”(ii) So, unless the contract specifically requires the contractor to
provide professional services, or such services are necessary to
perform the construction means and methods, design delegation does not
occur under the contract. Additionally,
the provision indicates that the contractor is not obligated to
provide professional services in violation of applicable law.
If the contractor anticipates that design may be delegated
under the contract, a careful review of the applicable state laws must
be undertaken to ensure professional services are not provided in
violation of state law.
Second,
although Article 3.12.10 provides that if design has been delegated
under the contract, the owner and architect will specify all
performance and design criteria that such services must satisfy, it
then goes on to provide that “...the Architect will review, approve
or take other appropriate action on submittals only for the limited
purpose of checking for conformance with information given and the
design concept expressed in the Contract Documents.”(ii)
Accordingly under subparagraph 3.12.10 (ii) as to that aspect
of project design properly delegated to it.
The contractor assumes design liability arising from the design
produced by the retained design professional even though the owner’s
architect reviews the design submitted by or on behalf of the
contractor. This clause
can create conflict when a design error or omission is asserted as the
cause of a claim. For
example, the issue will invariably arise as to whether the design
error/omission could be attributed to the design firm retained by the
contractor, the design professional retained by the owner in not
recognizing the error or omission in reviewing the work of the design
firm retained by the contractor and/or some combination of errors
among the two design firms.
Finally,
Article 3.12.10 indicates that “...the Contractor shall not be
responsible for the adequacy of the performance or the design criteria
required by the Contract Documents.”(ii)
While it may appear that this provision absolves the contractor
of liability for inadequacies in the performance and design criteria
provided by the design professional retained by the owner, the reality
is that in the event of a dispute a determination of liability will be
required, with the unavoidable delays, costs and disruptions that are
associated therewith. To
prevail, the contractor will be required to prove that it was the
performance and design specifications by the owner’s design
professional that caused a design error or omission ,and not an error
or omission on the part of the design professional retained by the
contractor.
II.
INSURANCE CONSIDERATIONS
A.
Commercial General Liability & Professional Liability
1. The
Commercial General Liability Policy
The
Commercial General Liability (CGL) policy provides third party
liability coverage to the contractor arising from its operations and
premises which may be owned and/or under the control of the
contractor. Of course,
coverage is subject to the terms and conditions of the policy of
insurance. Discussion of
the CGL policy will be limited to its application as regards design
liability.
The
CGL policy is written on an occurrence basis.
This means that provided a CGL policy was in force at the time
damages, bodily injury and/or property damage as defined, occur a
claim can be made at a later date.
This is true even if the policy in force at the time damages
occur is no longer in force. This
is in direct contrast to the claims-made policy which will be
discussed under section A.2.
The
CGL policy in most instances provides coverage for liability arising
from design which is incidental and necessary to the construction
means and methods of the contractor. A discussion of this type of design exposure and how the CGL
policy might respond follows under sections B. and C. below.
2. The
Professional Liability Policy
The
Professional Liability (PL) policy provides third party liability
coverage for damages arising from negligent design errors and
omissions of architects and engineers.
These policies provide coverage for design which falls within
design requiring some type of licensing and/or registration for the
state in which the design is provided.
Design coverage is subject to the terms and conditions of the
policy of insurance. Discussion
of the PL policy will be limited to its application as regards design
liability.
The
PL policy is written on a claims-made basis.
This means that the PL policy must be in force at the time a
claim is made. This is in
direct contrast to the occurrence based CGL policy discussed under
section A.1. above. This
is true even if the damages occurred prior to policy inception.
There is one exception to this in that claims-made polices have
what is referred to as a retro-active date of coverage.
The
claims-made policy has an initial policy inception date which is
significant in that coverage is only provided for negligent errors and
omissions that occur on or after the inception date.
Thus, if a claim were made during the initial policy term for a
negligent design error or omission that happened prior to the policy
inception date there would be no coverage.
For example, let us assume that the design-build project starts
on January 1, 1998 and the design-builder first obtains a professional
liability policy effective April 1, 1998.
Site and foundation designs are completed prior to policy
inception of April 1. On
July 1, 1998 it is discovered that the building has been sited
incorrectly due to an error in the site plan which will require
demolition of the foundation and reconstruction at the correct
location on the property. Even
though there is a PL policy in force there is no coverage as the site
plan was completed prior to policy inception.
It may be possible to obtain limited or possibly fully
retroactive coverage for prior acts.
Such requests must be made to the insurance markets being
solicited for quotations.
A
discussion of PL insurance follows in section D. below.
B.
Prior To Harbor v. Omni
(iii)
1. Design-Bid-Build
The
design-bid-build project delivery method is a rather simple exercise
in administration of insurance requirements contained in the
construction contract as the owner has separate contracts with, and
insurance requirements for, both the design firm and the contractor.
This discussion will be limited to the applicability of
Commercial General Liability (CGL) and Professional Liability (PL)
coverages.
The
owner’s contract with the design firm will contain a contractual
requirement to provide PL coverage for the negligent acts, errors and
omissions of the design firm in addition to a requirement that the
design firm carry CGL coverage. Conversely,
the owner does not generally require that the contractor carry PL
coverage as the project design is undertaken by a design firm under
separate contract to the owner, but will impose a contractual
requirement that the contractor carry CGL coverage.
This contractual relationship, in most instances, has provided
adequate protection for the owner in the event of design error, since
ordinarily the error is committed by the design firm under contract
with the owner.
However,
if the contractor has undertaken any design which is beyond that
associated with incidental design (e.g. shop drawings), the CGL
coverage of the contractor may be inadequate.
The CGL policy may not provide coverage for the damages
resulting from the negligent design including, but not limited to the
cost to redesign and reconstruct.
When
a contractor undertakes design beyond that associated with shop
drawings or similar incidental design necessitated by the means and
methods of construction, there is limited if any coverage for those
design services under the CGL policy.
The intent of the insurance marketplace in most instances,
under a CGL policy, is to provide only incidental design coverage for
the construction means and methods of the contractor.
There are a number of different methods by which an insurer can
accomplish the intended result. The
most common method is for the insurer to simply leave the CGL policy
unendorsed. In other
circumstances, and particularly where the contractor customarily
assumes responsibility for delegated design work, or performs
design-build work, in order to remove any doubt on the issue the
insurer may endorse the CGL policy to entirely exclude or provide
limited coverage arising from design related issues.
When the contractor regularly undertakes design responsibility,
(e.g., has in-house design capability, i.e. licensed or registered
design professionals providing design services), the insurer will in
most cases attach an absolute exclusion for such design services.
Prior
to 1990, the insurance marketplace had commonly attached Insurance
Services Organization (ISO) endorsement number CG 2243 to the CGL
policy of contractors with design exposure for which the insurer did
not wish to provide coverage under the CGL policy.
When CG 2243 was attached to the CGL policy of the contractor
both the contractor and their insurance agent knew that no coverage
was obtained for true professional design services, yet both assumed
that coverage for design within the construction means and methods
“would” be provided. As
will be discussed in Section
II. C., this assumption was shattered in 1990 when a leading federal
district court issued the decision of Harbor Insurance Company v. Omni
Construction Company, which held otherwise.
2. Design-Build
The
design-build project delivery method requires the owner to readdress
the insurance program requirements it imposes on the design-build
contractor, and requires the design-build team to readdress its
insurance programs to insure it is carrying appropriate coverages,
whether mandated by the contract or not
Now that both design and construction are being provided by a
single entity, attention must be directed to address how coverage for
design will be provided. For
discussion purposes, let us assume that the lead entity in the
design-build team is the contractor, which is true in over 70% of all
design-build projects.
Historically,
when a design-build project was undertaken the owner had two options
to pursue to make sure it had adequate insurance protection in the
event of design error. First, the contract may have only required that the
design-build contractor carry a standard Commercial General Liability
(CGL) insurance policy. Under
this scenario both the owner and the contractor/design-builder may
have been under the assumption that the CGL policy would provide
coverage for design related claims.
Second, in addition to the CGL insurance requirement, the owner
may have imposed a contractual requirement on the contractor to carry
design professional liability coverage.
However, when the design-build contract contained a design
professional liability coverage requirement it was typically fulfilled
by the owner accepting a certificate of insurance from the design firm
retained by the contractor. This
was problematic for both the owner and the contractor leading the
design-build team as the design firm did not hold a direct contract
with the owner, but was nevertheless fulfilling a contractual
obligation of the contractor/design-builder to the owner.
Under
that common scenario, when the owner/design-builder contract contains
a provision for the design-builder to provide a CGL policy only, there
is limited if any coverage for the design component of the project.
When the contractor/design-builder has in-house design
capability, licensed or registered design professionals are providing
design services which fall within the applicable state licensing and
registration laws. The CGL insurer will in most cases attach an absolute
exclusion for such design services to the CGL policy.
Or, insurers may simply leave the CGL policy unendorsed, which
for all intents and purposes leads to the same result: no coverage for
such design services.
Prior
to 1990 the insurance marketplace had commonly attached ISO
endorsement CG 2243 to the CGL policy of contractors with design
exposure for which the insurer did not wish to provide coverage under
the CGL policy. ISO
developed the CG 2243 endorsement intending for it to only be attached
to the CGL policy of a design firm as it excluded coverage for all
claims arising from design including construction means, methods,
sequences and techniques. Thus,
when insurers attached this endorsement to the CGL policy of a
contractor it had the unintended effect of precluding coverage for
design necessary to and within the construction means and methods.
C.
Post Harbor v. Omni
1. Insurance
Industry Impact
The
landmark case of Harbor Insurance Company v. Omni Construction Co.
(Harbor v. Omni) [iii]
changed the landscape of coverage provided by the CGL policy regarding
design services incidental to a contractor’s construction work (e.g.
construction means, methods, and techniques).
A brief outline of the factual circumstances of the case
follows, along with a discussion of the resulting new endorsements
developed by the Insurance Services Organization (ISO).
Omni
Construction undertook as a traditional general contractor
a project wherein a new building was being constructed.
As part of Omni’s scope of work its design subcontractor
designed a shoring system to protect an adjacent property.
During the course of construction the shoring system proved to
be inadequate and resulted in property damage to the adjacent
building. Omni (iii) subsequently turned to its insurer to remedy the
damage to the adjacent building,
coverage was denied, the insurer argued that, the CGL policy of
Omni (iii) had ISO endorsement CG 2243 attached and that the
endorsement expressly excluded coverage for design services.
The court accepted the insurer’s argument and held that the
shoring design, even though “incidental” to the construction work
was excluded from coverage under CG 2243.
In
response to the holding of Harbor v. Omni (iii),
which was clearly at
odds with the construction industry’s assumptions about coverage for
“incidental” design under the CG2243 endorsed CGL policy, ISO
developed two new endorsements, CG 2279 and CG 2280[iv],
for use by insurers on the CGL policy of a contractor.
Copies of these two endorsements are included as Exhibits A and
B.
ISO
endorsement CG 2279 (iv) was developed to correct the deficiencies of
CG 2243 in that it provides coverage for the construction means,
methods sequences and techniques of the contractor.
CG 2279 (iv) excludes coverage for professional services as
defined within the endorsement. However,
this endorsement does give back coverage for the construction means
and methods via a clause which states:
“Professional
services do not include services within the construction means,
methods, techniques, sequences and procedures employed by you in
connection with your operations in your capacity as a construction
contractor.”(iv)
While
the intent of this endorsement is to provide coverage for services
within the construction means, methods, etc.
There are still questions as to how much protection this will
afford the contractor. The
fact remains that if the CGL policy of the design-builder has ISO
endorsement CG 2279 (iv) attached, there is no coverage for design
professional services (as defined within the endorsement) within the
state licensing and registration laws. If this endorsement had been attached to the CGL policy of
Omni Construction, it is not at all clear that the outcome would have
been any different. It is
possible that it would not have been, because the shoring system
design, which was prepared and stamped by a licensed engineer employed
by the subcontractor design firm,
may be considered to be professional services as defined within
the endorsement. This
position would be further supported by those states which require
shoring systems to be developed by licensed design professionals.
Further, there may be some question as to how the language in
CG 2279 which specifically states “Professional services....employed
by you”(iv) may be interpreted.
What happens in the case of a subcontractor performing such
services, which was the case in Harbor v. Omni (iii)?
Moreover,
both owners and contractors must realize that even though there may
potentially be coverage for bodily injury and property damage arising
from the contractor’s construction means and methods, a CGL policy
endorsed with ISO endorsement CG 2279 (iv) will not respond to pay for
the redesign and reconstruction, both common claims for damages
accompanying a negligent design claim.
Insurers
that intend to provide coverage for traditional professional design
services provided by a contractor, beyond construction means and
methods, can attach ISO endorsement CG 2280 (iv) to the CGL policy.
CG 2280 (iv) is an endorsement which provides limited coverage
for design related errors. However,
since it is attached to the CGL policy, coverage is only provided for
bodily injury and property damage.
Again it does not provided coverage for remedial design and
reconstruction, i.e. the work itself.
There
is a further, perhaps more fundamental, problem with CG 2280 (iv).
A review of the first paragraph of the CG 2280 (iv) endorsement
reveals a serious limitation of the design related coverage.
The first paragraph states:
“This
insurance does not apply to “bodily injury”, “property
damage”, “personal injury” or “advertising injury” arising
out of the rendering of or failure to render any professional services
by you, but only with respect to your providing engineering,
architectural or surveying services in your capacity as an engineer,
architect or surveyor.” (iv)
Thus,
coverage provided by CG 2280 (iv) is limited to design which is
provided by an entity other than the named insured.
Coverage appears to be limited to subcontracted design work and
may not provide coverage when the contractor enters into a joint
venture with a design firm. What
happens when the contractor enters into a joint venture with another
contractor and the JV partner provides the design services?
The
unendorsed CGL policy obviously does not have the limitations imposed
by the attachment of either CG 2279 or CG 2280 (iv) and will provide
coverage for loss within the definitions of bodily injury and property
damage arising from design errors. However, as when either CG 2279 or CG 2280 (iv) are attached
coverage will not be provided for remedial design and reconstruction
of negligent design. Thus,
a contractor performing any design services should consider the
purchase of a professional liability policy.
2. Design-Bid-Build
With
the decision rendered in Harbor v. Omni it is clear that the CGL
policy of the contractor should not have ISO endorsement CG 2243
attached. If this
endorsement is attached to the CGL policy the contractor has
absolutely no coverage for claims arising from negligent design
(professional services as defined in the endorsement) even if the
design was a necessary component of the construction means and
methods.
An
unendorsed CGL policy provides the broadest coverage for bodily injury
and property damage arising from design related claims.
Attachment of either ISO endorsement CG 2279 or CG 2280 (iv)
restricts coverage for claims resulting in bodily injury and property
damage. In no event does
the CGL policy provide coverage for the remedial design and
reconstruction of the work itself arising from negligent design.
Additionally, many design related claims are passive in nature
and typically have a related passive economic loss asserted by the
owner which would not be covered under the CGL policy whether endorsed
or not.
Most
contractors consider the possibility of claims arising from the design
associated with construction means and methods to be a business risk
which they are willing to assume.
While the CGL policy, whether endorsed or not, may provide some
measure of coverage for bodily injury and property damage arising from
design errors, the contractor is still exposed for the remedial design
and reconstruction associated with negligent design.
Additionally, the contractor is also exposed to any passive
economic loss which may be incurred by the owner.
While historically contractors have been willing to assume this
risk they must now seriously consider the purchase of Professional
Liability coverage particularly if design delegation occurs under the
new AIA A201 Document - 1997 (ii).
3. Design-Build
There
is obviously coverage under an endorsed or unendorsed CGL policy for
claims arising from negligent design within the construction means and
methods resulting in bodily injury and property damage.
However, this is not the case when claims arise from negligent
design in the design-build project delivery method.
Design
of an entire project presents a significant design exposure to the
contractor undertaking a design-build project.
As respects design liability and the resultant redesign and
reconstruction resulting from negligent design, a contractor must not
rely upon the unendorsed CGL policy or a CGL policy endorsed with
either CG 2279 or CG 2280 (iv). As
discussed earlier in this section, there is no coverage for the
redesign and reconstruction resulting from negligent design, nor any
passive economic loss which may be incurred by the owner. The contractor must consider obtaining a standalone
professional liability policy to cover the design exposure of a
design-build project. This
is true whether the design is acquired through in-house resources, a
subcontract, joint venture or otherwise.
A discussion of Professional Liability considerations follows
in section D below.
D.
Professional Liability Coverage
1. Design-Build
The
design-builder and owner who assume that design coverage is provided
under a CGL policy either unendorsed or with ISO endorsement CG 2280
(iv) attached are partially correct in that there is coverage for
bodily injury and property damage arising from design-related claims.
Whether endorsed or not, the CGL policy does not provide
coverage for the correction of negligent design, e.g. the redesign and
reconstruction of the portion of the project which was incorrectly
designed, but will provide coverage for damages which fall within the
definitions of bodily injury and property damage contained in the CGL
policy. In this scenario
the owner will be forced to rely upon the financial capacity of the
design-builder to pay for the remedial design and construction arising
from the negligent design of the project.
If the owner sustains economic damages when there is no bodily
injury or property damage the CGL policy would not respond, thus
forcing the owner to again rely upon the financial capacity of the
design-builder as these passive economic damages do not qualify as
bodily injury or property damage as defined under the CGL policy.
Hence,
an owner who solely relies upon the CGL policy of a
contractor/design-builder and has not included a design professional
liability insurance provision in the construction contract has not
adequately addressed the design exposure presented in a design-build
project.
Therefore,
the case can be made that the owner/design-builder contract must
contain a provision for design professional liability coverage
maintained by the
design-builder with whom the owner holds the contract, in addition to
the CGL insurance requirement. Historically
the requirement for design professional liability coverage has been
satisfied by the owner accepting a certificate of insurance from
whatever design firm was
a part of the design-build team.
As reviewed earlier in this paper, the vast majority of
design-build projects are delivered with a contractor in the lead and
the design component is acquired from a design firm that is
independent from the contractor.
While the design firm which provides a certificate of insurance
has arguably fulfilled the contractual requirement of the
owner/design-builder contract, it is not the most effective method of
transferring the design risk to an insurance mechanism.
Yet this less than optimal method was perpetuated by the fact
that until recent years a contractor leading the design-build team
could not obtain its own design professional liability policy for the
exposure arising from the contingent or vicarious liability from the
design component of the design-build process.
When
a claim arises under the above scenario the owner would assert his
claim via the design-builder and expect a remedy from the
design-builder. The
contractor now must rely upon the indemnity agreement in the contract
with the design firm to provide a defense and investigate the claim.
This is very similar to the contractor asserting a claim for
negligent design to the owner under the design-bid-build project
delivery method in that the owner then has to rely upon the design
professional liability policy to provide a defense and indemnify the
owner. Consequently, the
owner has not achieved the simplicity in the insurance arena that he
expected to by selecting the design-build project delivery process.
If
the contractor is relying upon the design professional liability
policy of the design firm to satisfy the owner’s requirement that it
provide professional liability insurance, it should also realize that
such PL policies are not standardized as CGL polices are in the
insurance marketplace. Many
of the these architects and engineers policies do not include coverage
for design provided in the design-build project delivery method. Thus, even though the design firm may evidence design
liability coverage, via provision of a Certificate of Insurance, the
expected design coverage may not exist depending upon which insurance
company has provided a policy to the design firm.
Further,
the owner may have a claim for negligent supervision by the contractor
of the design component. Even
though the contractor has an indemnity agreement in the contract with
the design firm the professional liability policy of the design firm
would not provide a defense or indemnity to the
contractor/design-builder for the contractor’s own negligent acts,
errors or omissions. Now
there is involvement of multiple defense positions and potentially
adversarial relationships developing among the design-build team
members. This is not a
desirable position for the owner or the design-build team as the focus
of the design-build team is now being directed away from delivery of
the project to formulating respective defense postures for the claim.
Fortunately
the insurance industry has responded within the last three years with
professional liability policies which will provide coverage for the
contingent/vicarious liability of the contractor/design-builder for
the design component of the design-build project.
These annual policies were initially available from only a few
insurance carriers, but other insurers have readily entered this arena
as has been the case for the architects and engineers professional
liability market. Major
professional liability markets for this coverage include CNA/Schinnerer
along with Zurich and AIG. Other
markets include Kemper, American Equity, Evanston, Gulf, Lloyds
syndicates, RA&MCO, Reliance National and St. Paul.
A specimen policy available from CNA through Victor O.
Schinnerer & Company, Inc. is attached to this paper as Exhibit C.
Now
that such policies are readily available, owners can be secure in
specifying, in the owner/design-builder contract, that the
contractor/design-builder be required to provide its own design
professional liability coverage.
With the contractor-led design-build team providing its own
design professional liability policy the owner can now pursue his
claim against the design-builder knowing that there is an insurance
policy which will respond on behalf of the contractor and design-build
team providing coverage for the design component of the project.
This policy simplifies the insurance claims process for the
owner and design-build contractor as the design professional policy
maintained by the contractor, at least in theory, can resolve the
design-related claim and then pursue apportionment of liability among
the design-build team members, thus potentially resolving the claim in
a much more expeditious fashion.
As
with the traditional architects and engineers market the annual design
professional liability policies available to contractors are written
on a claims-made basis. These
policies include many of the same coverage features as traditional
architects and engineers policies including: coverage for claims
arising from negligent design (whether by the contractor’s in-house
design staff, its design subcontractor, or its joint venturer);
pollution claims; construction management services; and retroactive
coverage, among others. Some
of the insurance markets providing contractors design professional
liability coverage may include coverage for the faulty workmanship of
others which the contractor/design-builder has failed to detect.
Insurance
market capacity for this coverage is significant with limits of
$30,000,000+ available through some insurers.
Higher limits may also be structured with the additional
capacity of reinsurance markets.
There
are also two other Professional Liability insurance mechanisms which
the contractor/design-builder and owner may consider when determining
the need for protection in the event of a design error.
First the design firm(s) may obtain
a single project specific policy which will cover all design
team members of the design-build project.
Second, a project specific excess policy may be obtained by the
owner which will provide excess limits above those of the design firms
involved in the design-build project.
Many
owners and contractor/design-builders have a concern that the limits
of liability maintained by the design firms involved in a design-build
project may not be sufficient should a claim arise.
This is because many design professionals maintain design
professional liability limits of $1,000,000 or less.
Additionally, the design professional liability limit may be
eroded due to other claims or may not be available at all if the
design firm does not continuously renew the coverage.
As a consequence in many instances, owners will insert a
provision within the insurance section of the design-build contract
requiring that the design-builder obtain a project specific design
professional liability policy.
An
owner may feel that the limits issue of design related claims has been
adequately addressed by requiring a project specific policy, but...the
reality is that the project specific policy has the same limitations
as if the owner were relying upon the design firm providing a
certificate of insurance to fulfill the contractual requirement of
providing design professional liability coverage.
That is because a project specific design professional
liability policy addresses the issue of limits adequacy, but the owner
is still faced with the fact that the contractor/design-builder will
not be an insured under the policy because the policy will only
provide coverage to the design members of the design-build team.
Thus,
any claim asserted by the owner against the contractor/design-builder
for negligent supervision of the design component would not be covered
by the project specific policy since the policy only provides coverage
for the negligent acts, errors or omissions of the design firms named
as insureds. Further
complicating matters, since there is a project specific policy in
place, the annual policy of each design professional most likely will
exclude coverage for the specific project.
The inevitable result is involvement of multiple defense
positions and potentially adversarial relationships developing among
the design-build team members. This
is not a desirable position for the owner or the design-build team
since the focus now is being directed away from delivery of the
project to formulating respective defense postures for the claim.
Additionally, the project specific policy term may not extend
to cover the applicable design statute of limitations of the state in
which the project is constructed.
Finally,
project specific policies are very expensive by comparison to the
premiums for the annual policies maintained by design firms and/or
contractor/design-builders. And although the cost of project specific policies typically
is passed directly to the owner, or into the overall project pricing,
owners often balk at the additional expense.
Another
new insurance product allows the owner to purchase an excess project
specific policy. These
forms provide coverage in excess of the annual design professional
liability policy which may be maintained by the design-builder or any
of the design firms comprising the design-build team.
These policy forms are indemnity-only forms that also will
provide defense cost coverage for third party claims.
Indemnity-only policy forms provide only reimbursement to the
owner above the available proceeds of any PL coverage available
through the design firm(s) of a project and do not provide a defense
to the owner. Third party
claims are defined within these policies to exclude claims asserted
against the owner by any party providing services as a part of the
subject project.
These
owner excess project specific policies do provide an advantage to the
owner in that the owner is in control of the claims-made policy and
will always be aware of the limits available and how long the policy
is in force. These
policies provide coverage for design related claims which may arise
during the course of construction and for a specified discovery period
after substantial completion. In
the event that the professional liability limits of the design-builder
or the design team members are not available for any reason the owner
has a self-insured retention to fulfill prior to being indemnified
under the policy. The self-insured retention is a dollar amount which the owner
must satisfy either through the dollar amounts paid by the PL policy
of the design firm and/or its payment up to the specified policy
self-insured retention amount. Typically,
if the indemnity payment made by the insurer of the design firm does
not satisfy the self-insured retention amount the difference is simply
deducted from the amount payable to the owner under its indemnity
policy.
2.
Design Delegation
Design
delegation within the design-bid-build project delivery method requires both
the owner and the contractor to readdress insurance requirements
contained in their insurance programs.
In design-bid-build
without design delegation, the owner has separate contracts for
both the design firm and the contractor.
Now that a portion of the design has been delegated to the
contractor, attention must be directed to providing coverage for the
delegated design.
A
project delivered using the design delegation method is no different
from using the design-build method.
Design delegation is just a more refined version of
design-build since only a portion of the project is undertaken in
design-build mode. Most
commonly, HVAC and electrical systems could be delegated under Article
3.12.10 of A201 (ii), and certainly curtain walls could fall under
this provision. An
important point to remember is that any portion of the design of a
project in the design-bid-build contract has the potential to be
delegated under Article 3.12.10 of A201 (ii).
Design
delegation requires the same careful review of the insurance program
of the contractor and the owner rethinking the insurance requirements
under the design-bid-build contract.
No longer can the owner and contractor rely upon the Commercial
General Liability (CGL) policy as the sole liability coverage provided
by the contractor. Consideration
must be given to address the professional liability (PL) exposure
presented with the delegation of design to the contractor.
A
significant gap in coverage occurs if the contractor is relying upon
the CGL policy only when undertaking design delegation.
Unlike a stand alone PL policy, the CGL policy does not provide
coverage for the redesign and reconstruction of negligent design.
In fact, most design errors are passive in nature and incur a
passive economic loss by the owner - coverage not provided by the CGL
policy. In contrast, most
PL policy forms do provide coverage for passive economic loss in
addition to the redesign and reconstruction costs.
Historically
when a project was undertaken using the design-build method, the
owner/design-builder contract contained a design professional
liability coverage requirement which was typically fulfilled by the
owner’s acceptance of a certificate of insurance from the design
firm. This is problematic
not only in a total design-build arrangement, but also in a
design-bid-build arrangement when design delegation has occurred.
This is true for both the owner and the contractor to whom
design has been delegated since the design firm does not hold a direct
contract with the owner but is fulfilling a contractual obligation
between the owner and contractor.
When
the owner/design-builder contract contains a provision for the
design-builder to provide a CGL policy, there is limited - if any -
coverage for the design component of the project.
The intent of the insurance marketplace (under a CGL policy) is
to provide incidental design coverage for the means and methods of the
contractor. The insurer
can accomplish this through various methods.
The most common method is for the insurer to simply leave the
CGL policy unendorsed. In
other circumstances, the insurer may endorse the CGL policy to exclude
entirely or provide limited coverage arising from design related
issues, depending upon the design and/or design-build exposure
presented by a contractor.
An
insurer will, in most cases, attach an absolute exclusion for design
services provided by the contractor/design builder who has in-house
design capability, licensed or registered design professionals who are
providing design services that fall within the applicable state
licensing and registration laws.
The same issues regarding the unendorsed CGL policy or a CGL
policy endorsed with either CG 2279 or CG 2280 (iv) for a total
design-build project also apply regarding design delegation.
These issues were discussed in detail in Sections II B. &
C.
Fortunately,
professional liability products developed for design-build can also
provide coverage when design delegation occurs.
These professional liability policies will provide coverage for
the contingent/vicarious liability of the contractor/design-builder
for the design component of design delegation.
Section II.D.1. provides a discussion of the advantages and
coverage features of professional liability policies for contractors.
Project-specific
policies and owners excess design liability policies also may be
available for projects with design delegation.
The author recommends contacting professional liability
insurance markets to determine availability of coverage.
E.
Builders Risk Insurance
Finally,
the builders risk policy may be modified to provide coverage for
design related claims arising during the course of project
construction. A few
insurance markets have been amenable to modifying the builders risk
policy to provide coverage for design related damages.
This is certainly a change from past practices that totally
excluded claims arising from design error.
However, as with policies for design professional liability,
builders risk policies are not standardized, and a careful review of
the coverage form is necessary to determine the perils insured under
these typically all-risk policy forms.
Addressing the design-related claims issue under the builders
risk policy should be done in tandem with acquiring a design
professional liability policy.
If
the design coverage is only addressed with the builders risk policy, a
coverage gap obviously will occur since the builders risk policy
applies only for the duration of project construction.
It does not provide coverage for damages to third parties; for
any building claims which may arise after the substantial completion;
or in many instances testing operations.
Three
revisions must be implemented under the builders risk policy to
effectively address the design exposure of a design-build project.
These revisions include: (1) deletion of all design related
exclusions; (2) all members of the design-build team must be named as
insureds and (3) a waiver of subrogation must be included as respects
all design-build team members.
III.
CONCLUSIONS
Both
design-build and design delegation
present new and challenging liability and insurance issues for
contractors, design firms, owners and insurers.
Coverage for design related errors and omissions must be
revisited in the insurance programs of both the contractor and design
firm. Likewise, owners
must reconsider the insurance requirements provision of any contract
for design-build or design-bid-build that incorporates design
delegation.
Design-build
project delivery unequivocally places the contractor in a position of
responsibility for the design of a project.
Regardless of how the design is procured, whether by
subcontract, joint venture or in-house, the contractor must seriously
consider the exposure presented by the design component of the
project. There are many
options available to contractors for reducing risk- including
contractual arrangements or insurance coverage - but the contractor
must make an informed decision about how best to transfer the design
risk.
Since
Article 3.12.10 of the 1997 version of A201(ii)
has not been tested in the courts, it may be some time before
this contract provision is clear as to who has responsibility for
delegated design. In the
interim, contractors may want to undertake a review of their insurance
program with regard to coverage for delegated design services.
The addition of a professional liability policy is recommended
for contractors who anticipate that design may be delegated to them in
design-bid-build projects.
This
article should not be construed as legal advice or legal opinion.
It is intended for general informational purposes only.
Information which is copyrighted by and proprietary to Insurance Services
Office,Inc.,
CG 22 79 01 96, Exclusion - Contractors - Professional Liability and CG 22 80 01 96,
Limited Exclusion - Contractors - Professional Liability (ISO Material”) is included
in this publication. Use of the ISO Material is limited to ISO Participating Insurers
and their Authorized Representatives. Use by ISO Participating Insurers is limited to
use in those jurisdictions for which the insurer has appropriate participation with ISO.
Use of ISO Material by Authorized Representatives is limited to use solely on behalf of
one or more ISO Participating Insurers.
CNA
is the registered service mark and trade name of CNA Financial
Corporation.
______________________
i A
copy of “Project Delivery Systems: CM at Risk, Design-Build,
Design-Bid-Build” may be obtained by contacting The Construction
Industry Institute at The University of Texas at Austin, 3208 Red
River, Suite 300, Austin, Texas 78705-2650, Phone: (512) 471-4319,
Fax: (512) 499-8101.
ii AIA Document A201-1997 General Conditions of
the Contract for Construction is intended for use with many of the
AIA standard form documents. To obtain a copy of A201-1997 contact
the American Institute of Architects 1735 New York Avenue, N.W.,
Washington, D.C. 20006-5292.
iii Harbor Insurance Company v. Omni Construction
Co., 912 F2d 1520 (DC Cir 1990)
iv
CG 2279 0196 EXCLUSION - CONTRACTORS - PROFESSIONAL LIABILITY and
CG
2280 0196 LIMITED EXCLUSION - CONTRACTORS - PROFESSIONAL LIABILITY
includes copyrighted material of the Insurance Services Office, Inc.
with its permission. Copyright,
Insurance Services Office, Inc. 1996
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